The Rundown
- CUNA survey suggests PIN interchange dropping.
- Signature interchange stable, volume increasing.
- More data necessary to assess whether or not a trend.
A CUNA survey of some of its member credit unions suggests credit unions with less than $10 billion in assets have begun to take a hit to their debit card interchange even though they were not supposed to feel the impact of a debit interchange cap.
Passed as part of the Dodd-Frank financial reform act, the so-called Durbin amendment, named for its chief sponsor Illinois Sen. Richard Durbin (D), capped interchange for debit card issuers with more than $10 billion in assets but was supposed to exempt debit card issuers of fewer than $10 billion. Only four credit unions have assets of more than $10 billion and thus have their debit interchange capped by the rule though several others seem likely to pass that threshold this year.
To help facilitate the exemption, the large card brands and card processors widely implemented a two-tier interchange schedule that set one payment rate for institutions covered by the cap and another for institutions, largely community banks and most credit unions, that are not.
However CUNA's survey, which included data from between 120 and 130 voluntarily participating credit unions, suggested that the exemption has not proved effective at protecting debit interchange income for credit unions not covered by the cap.
The participating credit unions shared data from first-quarter 2010, before the cap was implemented, through third-quarter 2012, the first full quarter when the cap the was completely implemented, according to CUNA Chief Economist Bill Hampel.
The data showed that when it came to debit transactions that are validated by the cardholder's signature, the cap was effective. as interchange income for those transactions remained steady and the volume of those transactions grew, Hampel said.
But interchange income for debit transactions that are validated by a personal identification number dropped in the data by roughly 6%, Hampel reported, suggesting that the exemption was not as effective at protecting income from those transactions.
Hampel said the association did not yet have enough data to be able to tell whether this represented a one-time drop in debit interchange as an impact of the introduction of the new system or was the first quarter of a longer trend. More data would also allow the association to look more closely at what might be causing the drop.
Hampel said the association anticipates releasing a full report about the study in the second week of January.
The Durbin amendment's requirement that debit card issuers have two unaffiliated debit processing networks available for each transaction might mean have dropped PIN interchange because it means that PIN debit transactions are now being routinely routed through the network that brings the least interchange. Another possible cause for the drop may lie in an industrywide decline in PIN debit rates as card processing networks begin to compete more vigorously for retail clients.
The survey did not find everything in debit interchange to be gloomy, however, Hampel explained. Not only did the survey show that interchange for signature validated transactions held its own over the period studied, an increase in volume in those transactions helped mitigate the impact from the PIN debit interchange decline.
Even though the portion of the debit interchange pie made up by PIN debit transactions declined, Hampel explained, the overall debit interchange pie did not decline as much because the volume of signature debit transactions grew at a healthy pace.
Credit union card associations and payment CUSOs reported hearing similar information, from their members, though none had systematically surveyed their credit unions about their debit interchange experiences.
Robert Hackney, president of Card Services for Credit Unions, an association with the largest number of debit card issuing credit unions, said his organization had heard similar things from its members about their interchange income and added that the information did not surprise.
"Certainly there was nothing in the Durbin amendment that put any upward pressure on interchange," Hackney said. "It's basic economics. It increased the number of processing networks available at the point of sale and competition is going to bring the interchange rate for transactions moved over those networks down."
Jeff Russell, senior adviser to payment processing CUSO The Members Group, said that the 200 credit unions that process debit transactions with TMG had reported seeing their debit interchange increase slightly overall in part because so many of them were reporting the increased volume associated with signature debit transactions. But, at the same time, they had also mentioned seeing declines in PIN debit interchange that Russell said many had expected to see before the debit cap regulation was implemented.
He pointed out that in Australia, which had also implemented a dual interchange system where there were two rates, a lower, regulated rate and a generally higher unregulated rate, over time the unregulated rate declined to a level closer to the regulated rate.
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